What Contractor Should You Choose for a Home Insurance Claim?

The contractor you choose to repair your home during an insurance claim can have significant financial implications. One of the most common questions we get from homeowners who have been through a major loss is who they should choose as the contractor to help them rebuild their home.

You can choose to work with a contractor that you know and hire yourself, or you can work with the contractor from the insurer’s preferred network. It’s common practice for insurance companies to work with preferred contractors on their claims, but as a homeowner, it can feel like you’re giving up control and letting the insurer steer the rebuild or repair process.

There are pros and cons to either way of doing things. Whether or not you should work with the insurer’s preferred contractor depends on your concerns and priorities.

Reasons to Work with the Insurer’s Contractor

Agreeing to work with the insurer’s preferred contractor provides a level of protection from unexpected costs, price increases, and delays in the construction process. The insurance company is recommending that you hire this contractor, and as a result, they will usually take on responsibility for cost overruns.

Construction costs have been rising rapidly over the last couple of years, and homeowners relying on their insurance coverage to rebuild have been left in difficult positions. In 2021, home construction costs rose 11% over the year before, outpacing the inflation guards included in insurance policies to protect homeowners from rising costs. When you’re working with your own contractor, you will likely have to cover those higher costs.

In addition to higher lumber and commodity costs, high demand in the construction industry and issues with global supply chains lead to longer than expected construction times. It can be reassuring to know that the insurer has taken on responsibility for these risks.

The insurer’s preferred contractor can also provide warranties of work and set them out clearly in their contract. A warranty ensures that the contractor must return and fix any issues with completed construction work, including defects in construction materials.

Preferred contractors will also be familiar with common insurance jobs. If, for example, your mortgage lender is co-payable on your insurance claim, they may put in place a payment system where funds are only released at certain stages of completion. Preferred contractors are familiar with the system and know how to make it work.

The downside is that you may feel like you have less control over the rebuilding process. You may have concerns or frustrations if progress isn’t being made, as you want to start the recovery process in a timely fashion. In addition, preferred contractors often quote the rebuild or repair cost of your home at a lower amount than a contractor not affiliated with the insurance company. It is important to review the quote from the preferred contractor to ensure it includes everything necessary to return your home to its original condition.

Pros and Cons of Working with Your Own Contractor

Homeowners who want to work with their own contractor have the option of collecting a lump sum payment from the insurer and getting the work done themselves. Going with your own contractor gives you more control over the process but exposes you to more financial risk.

The most common reason we see homeowners go with their own contractor is the quality of work. Homeowners often worry that the insurer’s contractor will cut corners and not rebuild their home to the standard that they expect. Homeowners who choose their own contractor often do so because they have a good relationship with them and they’re more directly involved.

The downside is that if you run into unexpected costs, you will likely have to pay for them out of pocket. When the insurance company determines the size of your claim, they often have their preferred contractors bid on the job and accept the lowest estimate. If you decide to work with your own contractor, they pay out a lump sum based on their preferred contractor’s bid. It’s now in your hands if building costs exceed that settlement.

You may also run into an issue with the timeline. If there are construction delays, you may run out of Additional Living Expenses coverage. That can leave you paying rent on your temporary accommodations on your own, without reimbursement from the insurance company. If the estimate was that construction would take 6 months, but a delay extends the timeline to 8 months, the insurance company is not likely to adjust the amount they pay you for Additional Living Expenses. You’ll have to work with your contractor on delays.

Another factor that can unexpectedly increase your costs is your bylaw coverage. When you rebuild or repair your home, you will also have to update it to meet the current building code. Code updates are often grandfathered in, meaning you don’t need to update anything until you renovate, including repair work after a storm, fire, or flood. The materials and labour required to make those updates are not part of your regular structural insurance but your bylaw coverage. If you don’t have bylaw coverage, this can become an added expense whether you work with the insurer’s preferred contractor or your own.

Tying a Builder You Trust to the Insurance Company

A third alternative does exist. We often advise people to work with the builder you trust but to tie them to the insurance company so that you enjoy the same kinds of protections you would if you worked with the insurer’s preferred contractor.

This is where working with a lawyer can help, as they can help you negotiate an arrangement where your contractor of choice works with the insurance company. You can build in protections and make sure certain things run through the insurance company, even if you’re using your preferred vendor. It’s a situation that can work but depends on strong communication with the insurance company.

There are pros and cons to both the insurer’s preferred contractor and your own. With the insurer’s contractor, you protect yourself from price increases, delays, and other issues. You can deal directly with the insurance company when problems happen. Working with your own contractor, you have more control over the rebuilding process, and you may want to go this route if you have a good relationship with a contractor you trust.